Saturday, May 30, 2009

There Is Enough Gold

There Is Enough GoldThomas C. Allen

After I had finish writing Reconstruction of America’s Monetary and Banking System, I became acutely aware of an increasing number of people claiming that we cannot return to the gold standard because not enough gold exists. As a result I realized that a more detailed rebuttal was needed than the one in my book. The rebuttal needed to include a numeral demonstration of the adequacy of gold. Such a demonstration follows. It shows that enough gold exists for the classical gold-coin standard, the true gold standard, to work in a modern-day economy.

Keynesians, Friedmanites, and other gold-haters have convinced most people that not enough gold exists for gold to function as money. Therefore, an arbitrarily managed fiat monetary system is needed. The government or its central bank must issue the money and regulate its supply instead of allowing the markets to do so.

Even many ardent gold advocates hesitate to promote the true gold standard because they are convinced that not enough gold exists. Thus, they promote a fiat currency that incorporates gold.

One of the favorites is the commodity basket approach. The commodity basket monetary system is a fiat currency managed such that a price index of a collection of commodities is kept within a certain range. Gold is a component of the basket.[1]

Another favorite is for the U.S. government or its central bank, the Federal Reserve, to issue paper money backed by gold. Many are unclear whether this currency is redeemable or irredeemable. If it is redeemable, it would function similar to the U.S. notes between 1879 and 1933. However, it would not be accompanied by the gold standard as were U.S. notes during this era. If it is irredeemable, it would function like U.S. notes and federal reserve notes between 1933 and 1968. Both are forms of fiat money as the US government or the Federal Reserve arbitrarily regulates the money supply.

The true gold standard has the following attributes:
1. Gold does not back the money; gold is the money.
2. The price of gold is not fixed. The monetary unit is a specific weight of gold.
3. Gold coins circulate as money.
4. The value of a coin is the value of its metal content.
5. There is the free coinage of gold: Anyone can bring any amount of gold to the mint, which does not have to be owned by the government, and get it coined.
6. Anyone can melt coins without restriction and use the metal for nonmonetary purposes.
7. No restrictions are placed on exporting or importing gold.
8. All paper money is redeemable in gold on demand.
9. The supply of money is self-regulating and automatically adjusts to meet the demand for metallic money. The government does not manage or otherwise manipulate the money supply. No monetary policy is necessary, and none is desirable.
10. The government does not issue any paper money or buy gold and coin it on its own account.
11. Gold coins are the property of the individual holding them; they are not the property of the government. No restrictions or controls are placed on the private ownership of gold.
12. Legal tender laws are unnecessary and undesirable.
13. The government’s monetary duties are limited to defining the monetary unit, coining all gold presented to it for coinage and guaranteeing the weight and fineness of such coins, punishing counterfeiters of such coins, punishing issuers of paper money who fail to redeem their paper money on demand, and punishing acts of fraud and enforcing contracts in monetary matters.

The true silver standard has the same attributes.

Before showing that the quantity of gold and silver available for money is adequate, an explanation of the quantity theory of money and the quality of money is needed. Also needed is a explanations of the two ways of regulating the issuance of money.

To arrive at a proper understanding of money, one must think in terms of the quality of money instead of the quantity. He must also think in terms of letting the markets automatically regulate the money supply instead of letting the government or its central bank regulate the money supply arbitrarily.

Most people focus on the quantity of money and ignore the quality of money. Quality is a more important determinant of money’s purchasing power than quantity.[2]

Stated in its simplest form, the quantity theory of monetary is that "the value of unit [of money] is inversely proportional to the quantity in circulation."[3] As the supply of money increases, general prices increase, and vice versa as the supply decreases. Under this theory, money supply is the independent variable, and prices are the dependent variable. Thus, general prices depend on the total quantity of money in the country. Regulating the money supply is necessary to maintain stable prices. Underlying the quantity theory of money is the notion that more monetary units mean more wealth.

The quantity theory of money is seductive. It seems so simple and plausible that it tranquilizes most people into a false sense of security. It deceives people into believing that the government has the responsibility to manage the money supply.

Whereas the quantity theory of money focuses on the number (quantity) of monetary units, the quality theory of money focuses on the purchasing power (quality) of the monetary units. The quality theory of money emphasizes the quantity of goods for which money can be exchanged. Under this theory, money supply is a dependent variable that adjusts to the demand for money and leaves prices unaffected. It places great importance on money’s function as a standard of value and as a store of value.

Since fiat money lacks quality, quantity becomes highly important to the determination of its value. An extremely high correlation of 0.99 exists between the growth rate of fiat money and inflation.[4] With commodity money, which has quality, only a moderately positive correlation of 0.41, 0.49, or 0.71 occurs depending on the measurement of money used.[5] (The authors did not distinguish between metallic money and credit money. As changes in the quantity of specie have only a minor affect on general prices, the credit money that accompanies the metallic money probably causes most of the correlation with prices.)

The quantity theory of money probably has validity for fiat money. It may also have some validity for a 100-percent gold or silver standard (all paper money is merely a warehouse receipt for specie and all demand deposits are 100-percent backed by specie). However, when fiat currency reaches the hyperinflationary stage, the quantity of money theory fails—at least it has historically. It does not explain the relationship among the quantity of money, prices, and the demand for money. The quantity theory of money is a linear model trying to explain a nonlinear world.

The real bills doctrine (commercial money principle), which is discussed below, refutes the quantity theory of money. When the real bills doctrine is employed, money supply in the form of commercial money (real bills) or bank money (bank notes and checkable deposits) into which real bills are converted can increase enormously without causing an increase in general prices. The quantity theory of money predicts that an enormous increase in money supply will cause a significant increase in prices.

Under the real bills doctrine with redeemable bank money, the quantity theory of money is not true. The quality theory of money prevails. The supply of money responds automatically to market forces. It can increase enormously without causing a rise in general prices. Likewise, it can contract enormously without causing a decline in general prices. The quantity of money under the real bills doctrine depends on productivity.[6]

Two means can be used to regulate money supply: automatic regulation and arbitrary regulation. The markets regulate the money supply automatically. The government or its central bank regulates the money supply arbitrarily.

Should the decision on the amount of money needed to transact business and trade be left in the hands of the people directly, the U.S. government, or the banks? If one believes that the U.S. government or banks should decide the quantity of money, then he favors an arbitrarily managed system. If he believes that the people as a whole with each person acting in his individual capacity should decide the money supply, then he favors an automatically managed system. The former believes that politics, i.e., politicians and bureaucrats, can best manage the money supply. The latter believes that economics, i.e., the markets, can best manage the money supply.

When left to themselves, the people, with each person acting in his individual capacity, will arrive at and maintain an adequate supply of money. Governments and their central banks have proven themselves incompetent at achieving and maintaining a proper supply of money for a smooth operating economy.

The key distinction between fiat money that uses gold and the true gold standard is the way that the money supply is regulated. With fiat money using gold, the government or its central bank arbitrarily regulates the money supply. With the true gold standard, the markets automatically regulate the money supply.[7]

Under the true gold standard, the people acting individually according to their economic contribution decide the quantity of gold coins needed. If they want more gold coins, they bring gold to the mint for coinage. If they want fewer gold coins, they melt gold coins and use the gold for other purposes.

Likewise, with the true silver standard, the people acting individually increase and decrease the number of silver coins.

One must also abandon the notion of saving the federal reserve dollar by making it redeemable in gold. Such redemption is not only impractical; it is also unnecessary.

People cannot agree on what the redemption rate should be. Some argue that the redemption would be tens of thousands of dollars to the ounce of gold. Such high redemption rates are used to convince people of the impracticality and impossibility of returning to the gold standard.

Returning to the gold standard does not require a specific exchange rate between gold and the federal reserve dollar. All that is needed is to strip the federal reserve dollar of its legal tender property, to treat all money the same under the tax laws, and let them circulate together. Thus, gold coins, silver coins, and federal reserve dollars circulate parallel to each other with no fixed exchanged rate between any of them.[8]

Before showing that the quantity of gold and silver available for money is adequate, an explanation of real bills doctrine or the commercial money principal is needed. Under the real bills doctrine, only the productivity of the people limits the quantity of money created.

The real bills doctrine rests on the premise of the real bill of exchange. A real bill of exchange represents real goods that are really being sold. A real bill of exchange is a self-liquidating, short-term credit instrument. It is self-liquidating in that when the consumer buys the product, the consumer provides the money for the seller to use to pay the bill. It is short term in that the bill has to be paid off in 90 days or less.

The following example illustrates the real bills doctrine. When a producer sells his goods to a retailer, he draws a bill of exchange to give the retailer time to get the money by selling the goods. Typically, he allows the retailer 90 days to pay the bill. When the retailer accepts the bill, commercial money has been created. The producer can now use this bill to pay his suppliers. He can sell it to an investor or a bank. If he sells it to a bank, the bank can convert it into bank notes or checkbook money (just like it can convert gold coins into checkbook money when a depositor deposits gold coins in a checking account). A bank never creates money; it only converts one form of money (commercial money) to another form (bank notes and checkbook money). It is in effect dividing a cumbersome form of money into smaller units that can be more easily spent.

When people buy the products represented by the bill, the retailer pays the holder of the bill. When the bill is paid off, it ceases to exist. If a bank has bought the bill and has converted it to bank notes or checkbook money, that bank money is removed from circulation and cancelled when the bill is paid. Thus, the money created when the retailer accepts the bill goes out of existence when the retailer pays off the bill.

The real bills doctrine generates the money necessary to buy newly produced goods and retires that money when the goods are sold. With their production, the people create money. With their consumption, they destroy money. This creation and destruction occur without inflation or deflation. The supply of money always and automatically equals the demand for money.

With their productivity the people, instead of the government or banks, decide how much commercial money (real bills) to create. The people, instead of the government or the banks, decide how much commercial money to convert to bank money (bank notes and checkable deposits). The people have direct control of the money. Banks and the government play only a secondary role.

Banks do not create any money. Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits) as they do when they put gold coins in their vaults and issue gold certificates in place of the coins. All money creation is left directly in the hands of the people. Not only is a central bank not needed; it is detrimental to this monetary system. Also, although credit is involved, no borrowing or lending is involved in the creation of money.

The government is reduced to the role of an umpire. Its primary duty is to enforce contracts and punish persons guilty of fraud. These two important tasks are properly the function of State governments. Although the Constitution authorizes the U.S. government to coin money, coinage is not a necessary function of government. Private mints may coin money.

This system allows the money supply to increase enormously as productivity adds new goods to the markets and to contract enormously as these goods are consumed—all with little or no effect on general prices.

The real bills doctrine can only work with a precious metal standard. Like federal reserve notes, U.S. bills, and all forms of paper money, they are credit money. Like all credit moneys, they are promises and obligations. They must mature into a form of money that is no one’s obligation, such as gold or silver. Without the gold or silver standard, the real bills doctrine cannot function.[9]

The gold and silver standard accompanied by the real bills doctrine is not new. Adam Smith described such a system. Although not perfectly followed, this system was the prevailing system between the end of the Napoleonic wars and the beginning of World War I.

The following shows the enough gold exists to function as money in today’s economy.

Using four different approaches, Zurbuchen estimates the quantity of gold mined less the amount of gold lost between 3000 BC and 2004 AD to range between 4.06 billion ounces and 4.37 billion ounces. The average of his four estimates is 4.25 billion ounces (137,000 metric tonnes). His data show that the total amount of gold mined ranges between 4.30 billion ounces and 4.92 billion ounces with an average of 4.72 billion ounces (152,000 metric tons).[10] According to Price, 82 percent of the world’s gold stock was privately owned in 2007.[11]

Zurbuchen estimates that about 11.25 percent of the gold mined has been lost.[12] Probably, half the gold lost is not irrecoverably lost. It is lost because recovering it is not economically feasible.

At $1000 per ounce 4.25 billion ounces of gold equals $4.25 trillion dollars in federal reserve notes. When accompanied by the real bills doctrine, this amount of gold could accommodate more than $425 trillion in trade quarterly or more than $1.7 quadrillion annually.

To give some perspective to the magnitude of $1.7 quadrillion, the gross world product in 2007 was estimated to be $65.61 trillion.[13] Thus, enough gold was available in 2004 to accommodate 3.8 times the gross world product of 2007.

The silver standard should always accompany the gold standard for two important reasons. First it provides day labors and migrant workers with true full-bodied money for pay instead of token coins and paper money. Second, and more important, it protects the gold standard from degenerating into fiat money by providing true full-bodied money with which to buy and sell gold.[14]

Using five different approaches, Zurbuchen estimates the quantity of silver mined between 3000 BC and 2004 AD to range between 42.62 billion ounces and 48.87 billion ounces. The average of his five approaches is 44.552 billion ounces (1,385,400 metric tons).[15] Based on more information, he revised his average to 45.38 billion ounces.[16]

If the value of silver equals $20 in federal reserve notes, then $908 billion have been mined. At $50, the value of silver mined equals $2269 billion.

Using three difference approaches, Zurbuchen estimates between 20.66 and 21.33 billion ounces of silver exists as coins, bullion, jewelry, silverware, and art forms. The average of these three approaches is 20.99 billion ounces. He estimates that if the value of silver rose sufficiently 4 billion ounces could be recycled from existing industrial metals. This would make 24.99 billion ounces of silver available for use as coins.[17]

Probably, 85 to 90 percent of all the silver ever mined is recoverable; currently, recovering it is not economically feasible. If the monetary value of silver were to rise, more silver would become available for monetary use.

At $20 per ounce, 24.99 billion ounces could accommodate at least $50 trillion in trade quarterly or $200 trillion in trade annually under the real bills doctrine. At $50 per ounce the respective numbers are $125 trillion in trade quarterly and $500 trillion annually.

To claim that not enough gold exists to serve as money for the modern-day economy is absurd. Enough gold does exist. Furthermore, when the silver-coin standard and commercial money accompany the classical gold-coin standard, as it usually has been, enough money can be automatically created without the involvement of the government or banks to accommodate quadrillions, perhaps even nonillions, of euros, pounds, or dollars of trade.

Banks and the U.S. government need to be denied the power to create money. Money creation needs to be placed where the U.S. Constitution places it: directly in the hands of the people, with each person acting in his individual capacity according to his economic contribution. This is done when people acting individually coin gold and silver to expand the supply of coins and melt coins to contract the supply of coins. People can also create commercial money as they commonly did before World War I.

Gresham’s law explains why gold and silver are not seen circulating as money. According to Gresham’s law, lower quality money drives higher quality money out of circulation when the government declares that the low quality money is legal tender. For example, a person owes a $1000 debt. He can pay it with 20 $50 gold eagles (20 ounces of gold), 1000 $1 silver liberty dollars (1000 ounces of silver), 10 $100 U.S. notes, or 20 $50 federal reserve notes. Is he going to pay with the gold coins that he could exchange for $17,000 in U.S. notes or federal reserve notes? Is he going to pay with silver coins that he can exchange for $11,500 in U.S. notes or federal reserve notes? Or is he going to pay in U.S. notes or federal reserve notes? When the government allows debtors to cheat their creditors with irredeemable paper money, most debtors choose to cheat their creditors. The largest debtors, and therefore the biggest cheaters, are governments and banks. (This example also shows that the material of which the money is made is much more important than the government’s stamp in determining its real value. If the government’s stamp determines value, then no difference would exist among these monetary instruments.)

Gold and silver are high quality money and do a good job of maintaining purchasing power over time. Irredeemable paper money whether issued by the government or banks is low quality money and does a poor job of retaining purchasing power over time.

Silver and gold are the moneys of the Scriptures. Would God have given man silver and gold for money without providing enough?

Lawrence Reed wrote, "Old myths never die; they just keep showing up in economics and political science textbooks."[18] This is especially true of the myth that there is not enough gold to serve as money in the modern-day economy.

Before the United States adopt a paper currency as lawful money, they must overcome the constitutional hurdle. Only gold and silver are constitutional money. The "dollar" as used in the Constitution is not any thing that Congress declares it to be. The dollar of the Constitution is the weight of silver in a Spanish milled dollar. Any other dollar like the U.S. note dollar is not a constitutional dollar though the U.S. government has printed and issued it. The writers of the Constitution discussed delegating Congress the authority to print and issue paper money and decided against giving Congress that power. So if one wants the U.S. government to issue paper money constitutionally, he needs to amend the Constitution to give it that power.

The founding fathers never intended that the U.S. government should issue any kind of paper money. The Constitutional Convention discussed that issue, and the Convention rejected granting the U.S. government the authority to print or issue paper money. That is why the States delegated Congress the power to "coin" and not to "print," "emit," or "issue" money. What they decided was to keep the government out of money creation and issuance and leave money creation and issuance directly in the hands of the people with each person acting in his individual capacity according to his economic contribution.

Moreover, only gold and silver are constitutional money. The U.S. government has no authority to print or issue paper money. Thus, it can give no entity a monopoly to issue money. A return to constitution money will solve our monetary problems.[19]

The paragraphs that follow are excerpted from Reconstruction of America’s Monetary and Banking System addressing the myth that not enough gold exists to function as money.[20]
The third major argument against the gold standard is that not enough gold exists to accommodate the ever growing population and volume of production and trade. Those who claim that not enough gold exists fail to realize that value (quality), and not volume, makes the monetary standard.

When accompanied by the real bills doctrine, the world stock of gold is, and for centuries, has been adequate to accommodate world trade. Spahr remarks that "with efficient organization in the utilization of self-liquidating credit instruments [i.e., real bills] perhaps no one could compute with accuracy the volume of transactions which could rest upon the gold and silver reserves of a nation."[21] With a proper banking and credit system, one ounce of gold can do the work of 10, 100, or more ounces of gold. The work done by an ounce of gold depends on the quantity of commercial money (real bills) generated whether converted into bank money (bank notes and checkable deposits) or not. Only the productivity of the country limits the quantity of commercial money.

The important thing is not how much gold a country has; it is how much it can attract. Although the former is limited, the latter is not if the flow is fast enough.

About the inadequacy of the gold supply, James Laughlin, one of the authors of the Federal Reserve Act, remarked:

The fear of a scarcity of money is purely fictitious, because if immediate redemption of the media of exchange [in gold] is always preserved, there will always be perfect elasticity of the currency. . . . Hence, in a properly constituted monetary system, there can never be a place for a "managed currency," since that means the currency is intentionally issued as a means controlling prices, and not to provide a legitimate medium of exchange.[22]
To which Larson added:

A comparatively small amount of redeemable currency is ample because, first, almost 95% or even 99% of all transactions are consummated by means of checks or credit cards; and, second, because currency, whether in the form of specie or in notes redeemable in gold, will never be oarded, since, in themselves, they are completely sterile, and will therefore be spent or invested quickly, and thus returned to the banks or the Treasury—that is, by all normal individuals.[23]
People who oppose the gold standard because not enough gold exists suffer from the fiat-money mentality of thinking in terms of quantity and not quality. They believe that the more units of money that a country has, the wealthier that country is. They have difficulty conceiving that the quality of money determines its value. Because gold is high quality money, a small amount can move a large amount of goods and services. Because fiat money is low quality money, much is needed to do the work of a small amount of gold. When the silver standard and the real bills doctrine accompany the gold standard, to claim that not enough gold exists is ludicrous.
1. For more details on the commodity basket currency, see Thomas Coley Allen, Reconstruction of America’s Monetary System: A Return to Constitutional Money (Franklinton: TC Allen Co., 2009), pp. 256-258.

2. Antal E. Fekete, "Monetary Economics 101: The Real Bills Doctrine of Adam Smith," Lecture 13, Oct. 28, 2002, http// GoldisFreedom/ PVFfiles/ lecture101-13pvf.htm, Sept. 12, 2007.

3. Ralph George Hawtrey, Currency and Credit (London: Longsmans, Green and Co., 1919), p. 31.

4. Arthur J. Rolnick and Warren E. Weber, "Money, Inflation, and Output Under Fiat and Commodity Standards," Federal Reserve Bank of Minneapolis Quarterly Review, XXII (Spring 1998), 11-17.

5. Ibid.

6. For more details on the quantity theory of money and the quality theory of money, see Allen, pp. 7-8, 249-251.

7. For a more detail description of fiat money and how it differs from the true gold standard, see Allen, pp. 10-15, 49-72, 101-114, 238-252, 131-133.

8. For more details on phasing out federal reserve dollars and phasing in gold and silver coins, see Allen, pp. 256-258, 263-269.

9. For more details on commercial money, real bills, and real bills doctrine, see Allen, pp. 174-194.

10. David Zurbuchen, "The World’s Cumulative Gold and Silver Production," Jan. 14, 2006,, Oct. 8, 2008.

11. Hugo Salinas Price, "Where’s the Gold?", May 25, 2007, http:// editorials/ price/price053007.html, Oct. 21, 2008.

12. David Zurbuchen, "The World’s Cumulative Gold and Silver Production," Jan. 14, 2006, editorials_ 05/zurbuchen011506.html, Oct. 8, 2008.

13. Central Intelligence Agency, "The World Factbook," Oct. 26, 2008, library/publications/the-world-fact book/ geos/xx.html, Oct. 26, 2008.

14. For more details on the importance of the silver standard, see Allen, pp. 136-138.

15. David Zurbuchen, "The World’s Cumulative Gold and Silver Production," Jan. 14, 2006, editorials_ 05/zurbuchen011506.html, Oct. 8, 2008.

16. David Zurbuchen, "The Real Silver Deficit" zurbuchen052006pv.html, Oct. 16, 2008.

17. Ibid.

18. Lawrence W. Reed, "Great Myths of the Great Depression," (Machine Center for Public Policy), revised Sept. 2005.

19. For more details on constitutional money, see Allen, pp. 72-82.

20. Allen, pp. 120-121.

21. James Washington Bell and William Earl Spahr, A Proper Monetary and Banking System for the United States (New York: The Ronald Press Co., 1960), p. 32.

22. Martin A. Larson, The Federal Reserve and Our Manipulated Dollar (Greenwich: The Devin-Adair Co., 1975), p. 255.

23. Ibid.

Copyright © 2008, 2009 by Thomas Coley Allen. First Revision.

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